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The German automotive sector has benefited increasing domestic production as well as a growing share of car production overseas.

Market performance at a glance

Germany

Growing share of car production overseas

Increasingly dependent on the Chinese market

Ukraine crisis has already had an impact

According to the German Automotive Association VDA, the production of German passenger cars increased further in 2014, by 6.1% to 14.9 million units, after rising 3.4% in 2013. Domestic production increased 3%, while production abroad rose 8.1%. In the period January 2015 - August 2015 domestic car production and exports both grew 2%, while new car registrations in Germany rose 6%. This underlines the continued robust performance of the German automotive industry in H1 of 2015, which has widely benefited from the rebounding car demand in the Eurozone.

The share of German original equipment manufacturers (OEM) car production abroad continued to rise, from 61% in 2013 to 62.5 % in 2014, and is expected to reach 68% by 2018, at the expense of production in Germany. China is already a very important market for many German OEMs: currently contributing 37% to Volkswagen’s worldwide turnover (BMW: 25%, Daimler: 19%). Currently VW is losing market share in China, while Daimler was able to increase both unit output and sales by 29% and 30% respectively.

The recessions in Brazil and Russia and the current slowdown of Chinese economic growth all have an impact on the performance and margins of German automotive businesses, which can be offset by cost containment measures. German OEM´s export turnover has continued to grow, helped by a weaker Euro exchange rated against the USD.

German automotive suppliers are still making good profits and, in general, their solvency and liquidity are robust. However, margins have decreased for the last couple of years, due to increased material and labour costs. At the same time, suppliers are having to invest in engineering/production branches overseas in order to be close to OEMs that have relocated abroad. In order to reduce cost and to stem necessary investments, increasingly size matters. Therefore the concentration process in the suppliers segment is on-going: e.g. ZF acquired TRW, Magna took over Getrag , and Mahle persistently grows due to acquisitions (Behr, Letrika, Delphi Thermal, Kokusan Denki). At the same time there are long-term growth opportunities for German tier-1 and tier-2 suppliers in China, as they are welcomed partners for Chinese OEMs. This should reduce their dependency on German OEMs abroad.

The overall indebtedness of the automotive sector remains manageable and banks are generally willing to provide loans to automotive businesses. Our view of payment behaviour in the sector has been good over the last two years, with no increase in the number of non-payment notifications in the past six months. We expect the level of non-payments and insolvencies to remain stable or even to decrease slightly in the coming months - provided that the currently shaky international environment (i.e. developments in BRIC countries, Ukraine crisis, slowdown of Chinese growth) does not deteriorate further, the economic rebound in the Eurozone continues, and the current shake-up of the automotive sector due to the recently discovered manipulation of diesel emission data will not severely harm car producers and suppliers in the immediate future.

At present, our underwriting stance remains reasonably relaxed, as it was in 2013 and 2014, and only companies with lower ratings are underwritten more restrictively. We stay in direct contact with buyers to obtain their most recent financial information. Larger suppliers, tyre and aftermarket companies are monitored at least quarterly. Our focus is on businesses equity, profitability, working capital, cash flow, net debts and liabilities to banks.

We also closely monitor developments in the global macroeconomic and geopolitical environment for any early warning signs: while the current performance of the German car industry is still solid in general, any deterioration in economic performance and consumer sentiment would have straight and immediate negative effects on automotive sales. We also closely observe further developments regarding the diesel emission scandal for any repercussions on the market and individual businesses.

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